Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010[1] (“the Act”) created and authorized the Consumer Financial Protection Bureau (“CFPB” or “the Bureau”) to implement, examine for compliance with, and enforce “Federal consumer financial law.”[2] Under the Act, CFPB has regulatory, supervisory, and enforcement authority of depository institutions and credit unions with total assets of more than $10 billion, as well as certain nonbanks, regardless of size, including mortgage companies, originators, brokers, and servicers.[3]

The CFPB’s authority to implement and enforce “Federal consumer financial law” includes Title X (also known as the Consumer Financial Protection Act or “CFPA”), which prohibits “unfair, deceptive, or abusive acts and practices” (“UDAAP”) in connection with offering consumer financial products and services,[4] as well as other enumerated statutes and implementing regulations covering consumer financial products and services.[5] The statutes which the Bureau is authorized to implement and enforce include, but are not limited to, the following statutes regulating aspects of mortgage origination and/or servicing, and their implementing regulations:

Discussion
From its inception, the CFPB has prioritized and focused on mortgage origination and servicing issues, which it views as having contributed to the financial crisis, through new rule making, supervision, and enforcement. This article will examine the CFPB complaint gathering, regulatory and enforcement activity related to mortgage lending and servicing.

(a) Consumer Complaints
In 2012, the CFPB’s complaint portal, an integral part of its data gathering functions began accepting consumer complaints relating to mortgages. The CFPB analyzes consumer complaints, forwards them to the subject entities for response and monitors those responses. On a macro scale, the Bureau analyzes the number and nature of complaints filed against specific entities in deciding when investigation for violation of consumer financial protection laws is warranted. According to the Bureau’s Consumer Response Annual Report for 2013, mortgages were the most complained about product in 2013, accounting for 60,000 complaints, 37% of overall complaints. Most of the mortgage complaints related to consumers’ inability to pay as agreed, including loan modification, collection and foreclosure issues.[6]

In its winter 2013 Supervisory Highlights issued in January of 2014,[7] the Bureau also identified mortgage servicing issues uncovered through its 2013 supervisory activities. Although the issues identified in the report occurred before new mortgage rules went into effect, the Bureau found violations of the CFPA’s ban on unfair, abusive or deceptive acts and practices.[8] Examples of practices it found to be unfair or deceptive in violation of the CFPA included:

failure of servicers to honor loan modifications after servicing transfers;

The report further stated that CFPB examiners imposed remedial measures and that it has opened investigations for potential enforcement actions. Allegations made in the consent judgment entered against Ocwen Financial Corporation for UDAAP violations,[9] discussed at further at page 9, infra, echo many of the servicing issues identified by the Bureau in the Supervisory Highlights.

(b) Rulemaking
By now, the banking industry is well aware of the new mortgage related rules issued in 2012 and 2013 which went into effect in January 2014 and additional rules which are pending. Detailed analysis of the new rules is beyond the scope of this article, but an overview is worthy of mention as the rules were drafted at least in part based on the Bureau’s analysis of consumer complaints and information acquired through supervisory and investigatory activity. Furthermore, based on the CFPB’s enforcement activity of existing rules to date, vigorous enforcement of the new rules must be expected.

New mortgage-related rules include, among others:

Mortgage Servicing Rules.[10] New mortgage servicing rules which went into effect in January amend Regulation Z (“Reg. Z”), which implements Truth in Lending Act (“TILA”), and Regulation X (“Reg. X”), which implements Real Estate Settlement Procedures Act (“RESPA”). The amendments to Reg. Z require mortgage payments to be credited the date of receipt, accurate payoff balances to be provided within seven days of request, and 210 days advance notice of interest rate adjustments.[11] They also prescribe content for rate adjustment notices, and content, delivery and frequency of periodic billing statements. Amendments to Reg. X require servicers to promptly contact delinquent borrowers and offer loss mitigation options and refrain from foreclosure during evaluation for loss mitigation options.[12] They also add requirements for responding to consumer requests for information, resolving errors, record retention, servicing transfers, and force placement of hazard insurance.

Ability to Repay/Qualified Mortgage Rule.[13] Requires financial institutions to make a reasonable good faith determination that a consumer has a reasonable ability to repay the loan, considering factors such as the consumer’s income or assets and employment status, the mortgage loan payment and other ongoing expenses related to the mortgage or property. A presumption of compliance with the rule applies to “Qualified Mortgages,” i.e., those which meet certain underwriting criteria, including eligibility for purchase by a GSE and absence of risky features such as allowing interest only payments, negative amortization, or balloon payments.

Loan Originator Rule.[14] Prohibits compensation to a loan originator based on the terms of the loan transaction, or a “proxy” for the terms of the transaction. Thus, any rate or cost of a loan which is a term of transaction cannot be the basis for compensation. Under the proxy analysis, pricing of a transaction may relate not only to the terms of the loan, but also on whether the originator has discretion to steer the consumer toward a product with different terms. Also requires individual loan officers, mortgage brokers, and creditors to be “qualified” and, “registered” or “licensed” to the extent required under State and Federal law and imposes duties on loan originator organizations to make sure that their individual loan originators are licensed or registered under the Safe Act.

Integrated Loan Disclosures.[15] This rule, which takes effect on August 1, 2015, integrates home mortgage disclosures required by TILA and RESPA. The new rule requires two new forms to replace the existing TILA disclosure form and RESPA (HUD) statement: the Loan Estimate form, to be provided within three days of a mortgage application and the Closing Disclosure, which must be provided three days before closing a home mortgage.

Home Mortgage Disclosure Act.[16] The CFPB is preparing to issue new rules which will require disclosure of far more information to regulators, including additional pricing and underwriting information. It has already issued guidance highlighting requirement of accurate collection and reporting of mortgage data, and begun enforcement actions.

Home Ownership and Equity Protection Act (HOEPA) Rule.[17] Requires additional disclosures and protection for consumers for “high-cost” mortgages. Consumer purchase money mortgages, refinances, closed-end equity loans, and open-ended credit plans secured by the consumer’s principal dwelling are subject to the Rule. An analysis of the APR, points and fees, and pre-payment penalties is required to determine whether the transaction is subject to the HOEPA high-cost mortgage requirements.

(c) Supervision and Examination
The CFPB’s Supervision and Examination Manual details how supervised entities are examined for compliance with federal consumer financial laws.[18] Additional updated examination procedures have also been issued as new mortgage related rules have taken effect including the following:

(d) Interagency Cooperation
The Bureau actively shares information and cooperates with other regulatory agencies including the Federal Trade Commission (“FTC”), Federal Deposit Insurance Corporation (“FDIC”), Office of the Comptroller of the Currency (“OCC”), Housing and Urban Development (“HUD”), Federal Housing Finance Agency (“FHFA”), National Utility Contractors Association (“NCUA”), Office of Administrative Law Judges of the Secretary of State (“SEC”), and the Department of Justice (“DOJ”) under various interagency agreements.[19]

Evidence of interagency information sharing and cooperation appears in the regulations themselves, in administrative complaints and litigation, and in enforcement orders entered jointly with other agencies based on interagency investigations.[20] Entities subject to CFPB supervision should assume that the CFPB has access to information obtained by other agencies which relate to the CFPB’s enforcement authority. Supervised entitles should also expect that the CFPB will share information it obtains through its investigations with law enforcement authorities, including state Attorney Generals and the Department of Justice, when it finds evidence of violations of consumer financial protection law which may be subject to criminal prosecution, such as fair lending violations.

(e) Enforcement Activity
In fulfilling its mandate to enforce federal consumer financial law, the CFPB is authorized to conduct hearings and administrative proceedings, including special cease and desist proceedings, or bring litigation in federal courts.[21] Its administrative proceedings have typically been based on violations uncovered in compliance examinations or investigations, often initiated as the result of consumer complaints and conducted jointly with other agencies.[22]

The administrative proceedings have typically resulted in consent orders in which the defendant acknowledges the violations charged. The consent orders have also generally included:

In addition to the administrative proceedings, the Bureau has brought actions in federal district courts with other agencies relating to mortgage insurance issued by captive reinsurers, RESPA violations, unfair, deceptive or abusive acts or practices, loan originator compensation, mortgage servicing and ECOA violations, all discussed below.

The Bureau also has an agreement with the National Association of Attorneys General to share investigatory information, coordinate enforcement activities and route complaints between the CFPB and the state attorneys general.[23] The Bureau and state attorneys general have jointly filed lawsuits for violations of consumer protection law.

The Bureau opened its complaint portal in 2011 by first accepting complaints about credit card products. Its first five administrative proceedings, brought in 2012, all involved credit cards and resulted from investigations apparently initiated as a result of consumer complaints. As the CFPB complaint portal did not begin accepting mortgage complaints until 2012, the first mortgage enforcement proceedings were not brought until 2013. Below are summarized the enforcement actions which relate to aspects mortgage origination or servicing through administrative proceedings and litigation.

(f) 2012 Enforcement Activity. Debt Collection Practices.
The Fair Debt Collections Act[24] (“FDCPA”) prohibits third party debt collectors and debt buyers who acquire and collect delinquent debt from engaging in unfair, deceptive or abusive practices in collecting consumer debt. In 2012, the CFPB, FDIC, OCC and Federal Reserve Board obtained consent orders against three subsidiaries of American Express for deceptive debt collection practices. The FDCPA did not apply because the subject debt was not collected by third parties. However, the agencies found that companies deceived consumers regarding benefits to paying off old credit card debt in violation of the CFPA prohibition on deceptive practices. The companies were ordered to refund $85 million to approximately 250,000 customers for several illegal card practices, including deceptive debt collection.[25] Although mortgage debt was not involved, the basis for the findings in the orders might also apply to mortgage debt collection.

The CFPB also filed an amicus brief in an FDCPA suit against a company collecting mortgage debt in which the consumers claimed to have received harassing and threatening phone calls to induce them to pay mortgage debt to avoid foreclosure.[26] The district court rejected the consumers’ claims on grounds that because the company was also pursuing foreclosure, the challenged practices related to enforcement of a security interest, which does not qualify as “debt collection” under the FDCPA. By its amicus brief, the Bureau persuaded the 11th Circuit to reverse and adopt the Bureau’s position that companies collecting mortgage debt and pursuing foreclosure actions could still qualify as debt collectors.

(g) 2013 Enforcement Activity

(1) RESPA violations – kickbacks for mortgage referrals.
Section 8(a) of RESPA prohibits giving a “fee, kickback, or thing of value” in exchange for a referral of business related to a real-estate-settlement service.[27] Under RESPA’s implementing regulations, “[w]hen a thing of value is ... connected in any way with the volume or value of the business referred,” it is evidence that it was given “for the referral of business.”[28]

In CFPB v. Paul Taylor, et al.,[29] the CFPB’s first 2013 administrative proceeding, it found a residential real estate developer violated RESPA by accepting “fee[s], kickback[s], or thing[s] of value” in connection with a mortgage servicing joint venture, Stratford Mortgage Servicing created by the developer with a bank. Under the arrangement, the developer received payments based on his interest in Stratford in exchange for referrals of customers for mortgage loans and other real estate settlement services involving federally related mortgage loans.

Prior to the CFPB’s action against the developer, Stratford was dissolved and the FDIC imposed a civil money penalty on the bank based on its determination that “the Bank violated [RESPA] by creating and operating a company that was used by [the Bank] as a conduit for paying unlawful referral fees ... for the referral of mortgage loan customers to the Bank.” Stratford was the company “used as a conduit for paying unlawful referral fees” and Taylor was the recipient of those fees. The order is silent as to the amount of the FDIC civil penalty, but the developer was ordered to disgorge more than $118,000.00 in fees received from the banks which were found to be kickbacks for referring mortgage origination business, and prohibited from engaging in future real estate settlement services, including mortgage origination.

(2) RESPA violations – kickbacks through captive reinsurance.
In April 2013, the CFPB filed lawsuits in the Southern District of Florida resulting in consent judgments assessing over $15 million in civil penalties against four national mortgage insurers. The CFPB alleged that the insurers received insurance business in exchange for kickbacks to the lenders in violation of RESPA and the CFPA.[30] The kickbacks were allegedly provided to the lenders through the purchase by the defendants of reinsurance from the lenders’ captive reinsurers that was essentially worthless.

Specifically, the Bureau asserted that in order to capture a portion of lucrative insurance premiums, the lenders set up the captive reinsurers and entered into reinsurance arrangements by which the defendants ceded back a portion of the premiums to the captive subsidiaries. The CFPB alleged that the ceded payments to the captive reinsurers did not correspond to the portion of the insurance risk transferred, and that the payments were thus in effect prohibited kickbacks to the lenders in exchange for the referral of insurance business to the mortgage insurers in violation of RESPA and the CFPA.

These orders indicate that arrangements between lenders and insurers for reinsurance through captive reinsurers may not pass CFPB scrutiny, unless the reinsurance has actual value and the reinsurance premiums correspond to the actual risk reinsured.

(3) RESPA violations – kickbacks to law firm.
In October 2013, the CFPB filed suit in a Kentucky District Court against Borders & Borders, a Kentucky law firm, for allegedly paying illegal kickbacks for real estate settlement referrals through a network of shell companies.[31] The lawsuit alleges that the firm and its principals violated RESPA by operating a network of affiliated companies to pay kickbacks for referrals of mortgage settlement business. When a real estate or mortgage broker with a preexisting arrangement referred a homebuyer to the firm for closing or other settlement services, the firm would arrange for the title insurance to be issued by the corresponding joint venture and the profits split between the joint venture’s owners, i.e., the law firm’s principals and the referring real estate or mortgage broker. The CFPB alleges that the profit sharing arrangement disguised illegal kickbacks, and seeks disgorgement of fees received by the firm for closing services provided to consumers referred by the referring brokerages as well as injunctive relief.

In announcing the lawsuit, the Bureau stated that it would “continue to enforce RESPA’s anti-kickback provisions to protect consumers and honest businesses and deter individuals from engaging in illegal activity.”

(4) HMDA reporting violations.
In consent orders entered in administrative proceedings brought against Washington Federal and Mortgage Master, Inc., the CFPB found, based upon its examinations and sampling of Home Mortgage Disclosure Act (“HMDA”) data, that the mortgage lenders violated HMDA reporting requirements and that their compliance management systems did not maintain procedures reasonably adapted to avoid errors in their HMDA data reporting.

The Washington Federal Consent Order[32] states that as part of its supervision and examination of the bank for HMDA compliance, the CFPB conducted a data integrity review of a sample of its HMDA reporting data and found a 38% error rate. In addition to correcting the data, the Consent Order required Washington Federal to cease and desist violating the law, submit a comprehensive written compliance plan to the CFPB for approval, to include, inter alia, reporting requirements, regular testing of data integrity, and training on HMDA requirements. A $34,000.00 civil penalty was also assessed.

Unlike Washington Federal,[33] Mortgage Master was not an insured depository institution, and the Massachusetts banking regulators had previously found excessive error rates in its HMDA reporting for 2007, 2009 and 2010. The CFPB began a data integrity review in 2012 that found that Mortgage Master’s error rate violated CFPB thresholds. The Mortgage Master Consent Order[34] contained provisions similar to those in the Washington Federal order, but also assessed civil penalties of $425,000 by reason of the current and past violations.

(5) Fair Lending/ECOA pricing violations
The CFPB has emphasized preventing and addressing discrimination in loan pricing. In a December 20, 2013 consent order, the CFPB ordered Ally Bank, an indirect auto lender, to pay approximately $80 million in refunds and $18 million in penalties for an alleged pattern of discrimination against minorities in setting interest rates.[35] The CFPB and DOJ used a proxy based analysis in finding the alleged pattern of discrimination in the Ally Bank case. Their methodology employed combined geographic and name-based probabilities, based on census bureau data. The joint race and national origin probabilities were then used in the CFPB and DOJ models to estimate disparities in dealer markup on the basis of race or national origin.

Only three days after entry of the Ally Bank Order, the DOJ and CFPB jointly filed a complaint and proposed consent order against National City Bank in a Pennsylvania District Court[36] requiring PNC Bank, as successor to National City Bank, to establish a $35 million settlement fund for African-American borrowers allegedly affected by discriminatory mortgage loan pricing. The agencies allege that National City Bank’s discretionary pricing and compensation policies caused the discriminatory pricing differences. Specifically, National City Bank gave its loan officers and brokers the discretion to set borrowers’ rates and fees, and then compensated the officers and brokers from extra costs paid by consumers. The complaint alleges African-American and Hispanic borrowers paid higher costs because of this discriminatory pricing and compensation scheme.

(6) UDAAP in Mortgage Servicing
On December 16, 2013, the CFPB and 49 state attorneys general filed a consent judgment in the District of Columbia against Ocwen Financial Corporation and Ocwen Loan Servicing, the nation’s largest non-bank mortgage servicer (“Ocwen”).[37] According to the CFPB, Ocwen engaged in “systemic misconduct” in mortgage servicing which allegedly pushed consumers into foreclosure. Ocwen was ordered to provide $2 billion in principal reduction to underwater borrowers and refund $127 million to borrowers already foreclosed upon. The CFPB and Attorneys Generals specifically found that the company violated the CFPA’s UDAAP prohibitions[38] when it:

deceptively sought to collect payments under the mortgage’s original unmodified terms

after the consumer had already begun a loan modification with the prior servicer;

engaged in illegal foreclosure practices and mishandling foreclosures by providing false or misleading information to consumers about the status of foreclosure proceedings where the borrower was in good faith actively pursuing a loss mitigation alternative also offered by Ocwen, and robo-signing foreclosure documents, including preparing, executing, notarizing, and filing affidavits in foreclosure proceedings with courts and government agencies without verifying the information.

As mentioned in the CFPB’s Winter Supervisory highlights discussed above, at page 2, Ocwen’s mortgage servicing errors occurred before the new mortgage servicing regulations went into effect, but were still found to be in violation of the Act’s UDAAP prohibitions.

(h) 2014 Enforcement Activity through March 31st
A consent order issued in CFPB v. Fidelity Mortgage Corporation and Mark Figert, the Bureau’s first administrative action of 2014, adjudicated violations of RESPA’s prohibition on giving “fee, kickback, or thing of value” in exchange for a referral of business related to a real-estate-settlement service under agreement between mortgage company’s office lessor to refer home mortgage loans to mortgage company lessee. Required disgorgement of $27,000.00 in “origination” fees, and assessed $54,000.00 civil money penalty to be paid by Fidelity Mortgage Corporation, and its former owner and current president, Mark Figert.[39]

In late January, the CFPB initiated an administrative proceeding against PHH Corporation, PHH Mortgage Corporation, PHH Home Loans LLC, Atrium Insurance Corporation, and Atrium Reinsurance Corporation, alleging that PHH harmed consumers through a mortgage insurance kickback scheme dating back to 1995. The notice of charges accuses PHH of having received as much as 40% of premiums paid to mortgage insurers.[40] The Bureau alleges that PHH manipulated its allocation of mortgage insurance business to maximize kickback reinsurance payments for itself and accuses PHH Corporation and its affiliates of:

Kickbacks: Setting up a system whereby it received as much as 40% of the premiums that consumers paid to mortgage insurers;

Overcharging Loans: Charging more for loans to consumers who did not buy mortgage insurance from one of its kickback partners and charging these consumers additional percentage points on their loans; and

Creating Higher-Priced Insurance: Pressuring mortgage insurers to “purchase” its reinsurance with the understanding or agreement that the insurers would then receive borrower referrals from PHH; continuing to steer business to its mortgage insurance partners even when it knew the prices its partners charged were higher than competitors’ prices.

The CFPB is seeking a civil fine, a permanent injunction and victim restitution. The complaint in the PHH Action echoes claims made by the CFPB in its 2013 action against mortgage insurers who paid for captive reinsurance discussed above.

In February 2014, a consent order was entered in the Bureau’s administrative proceeding against Alliance Lending for violating RESPA prohibitions on paying unearned fees in a real estate settlement.[41] Alliance provided loss mitigation financing for homeowners in the form of new mortgage loans, receiving a loss mitigation fee at closing of each new mortgage. Alliance financed the new mortgages under warehouse facilities and split the loss mitigation fees with the warehouse lenders. After changing warehouse lenders, it continued to split origination fees with the original lenders even though they no longer provided financing. Alliance self-reported the potential RESPA violation of paying unearned settlement fees prompting a CFPB investigation and order assessing $83,000.00 in civil money penalties and requiring production of numerous non-privileged materials as requested by the CFPB. In announcing the consent order, CFPB director Cordray referred to CFPB Bulletin 2013-06,[42] which encouraged self-reporting of violations and extensive cooperation by targeted entities with agencies in investigations. Cordray also stated in the announcement that CFPB would “continue to take into account the self-reporting and cooperation of companies in determining how to resolve such matters.”

Conclusion
The CFPB’s enforcement activity to date has not included the new mortgage rules. It is the author’s opinion that the new servicing rules which went into effect in January, which substantially revise servicer duties concerning communications with borrowers, and in particular, delinquent borrowers, will be a major source of future enforcement activity. Moreover, the enforcement activity pursued to date with respect to the CFPA, RESPA, and other existing consumer protection laws, indicates the Bureau will likely continue to:

[19] 12 U.S.C. 5495 directs the Bureau to “coordinate with the Commission, the Commodity Futures Trading Commission, the Federal Trade Commission, and other Federal agencies and State regulators, as appropriate, to promote consistent regulatory treatment of consumer financial and investment products and services.” See, for example: http://www.consumerfinance.gov/blog/consumer-response-now-sharing-complaints-with-ftc-consumer-sentinel/

[20] These two consent orders were entered in 2012 actions jointly filed by the CFPB and FDIC against American Express and Discover Bank, respectively: http://files.consumerfinance.gov/f/201210_cfpb_001_Amex_Consent_Order.pdf; http://files.consumerfinance.gov/f/201209_cfpb_0005_001_Consent_Order.pdf

[38] An act or practice is “unfair” under the CFPA if it (1) causes or is likely to cause substantial injury to consumers; (2) such injury is not reasonably avoidable by consumers; and (3) such injury is not outweighed by countervailing benefits to consumers or to competition. 12 U.S.C. § 5531(c). An act or practice may be considered “deceptive” under the CFPA if the act or practice (1) misleads or is likely to mislead the consumer; (2) the consumer’s interpretation of the act or practice is reasonable under the circumstances; and (3) the misleading act or practice is material. This is the FTC definition of deception, http://www.ftc.gov/ftc-policy-statement-on-deception, which is incorporated in the CFPB Supervision and Examination Manual: http://files.consumerfinance.gov/f/201210 cfpb supervision-and-examination-manual-v2.pdf.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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